Closing costs · Regulation X (RESPA)Initial escrow deposit at closing: why buyers pay months of taxes and insurance up front

Buyers are often surprised by the 'initial escrow payment at closing' on their Closing Disclosure. Regulation X (12 CFR 1024.17) sets the most a lender or servicer may require. When an escrow account is created, the servicer may collect an amount sufficient to pay the taxes, insurance and other escrowed charges attributable to the period from when they were last paid until the first payment date – figured so that the account's lowest projected month-end balance during the year is zero – plus a cushion of no more than one-sixth of the estimated total annual payments from the account. In the aggregate analysis the rule prescribes, the cushion is two months of escrow payments, or less if state law or the mortgage document sets a lower amount; servicers may use a smaller cushion or none at all. After closing, the monthly escrow deposit can be one-twelfth of the expected annual payments plus whatever keeps the cushion within the same limit. The servicer must analyze the account before setting it up and give the borrower an initial escrow account statement – the monthly payment, the escrow portion, each expected tax, insurance and other charge with its disbursement date, the cushion and a month-by-month trial balance – at settlement or within 45 calendar days. After each computation year, an annual statement follows within 30 days.